London (Parliament Politics Magazine) – The Bank of England has slashed interest rates despite cautioning that Rachel Reeves’s budget will confuse its battle against high inflation by holding the rate beyond its 2% target for a year longer than previously anticipated.
In an action widely expected in financial markets, the Bank’s monetary policy committee (MPC) voted by a majority of eight to one to decrease the base rate from 5% to 4.75% to relieve the pressure on households and businesses from high borrowing costs.
How will the Bank of England’s rate cut affect inflation?
The central bank expressed the chancellor’s tax and spending projects would add to inflationary pressures even as they contributed to more rapid economic growth, a development likely to be seized on by the government’s critics. Releasing its verdict on last week’s budget, the Bank stated it expected the chancellor’s £70bn of additional spending supported by higher taxes and borrowing to add approximately 0.5 percentage points to headline inflation and 0.75% to gross domestic product (GDP).
It stated the impact would be pushed in part by Reeves’s plan to increase the rate of employer national insurance contributions (NICs) and the national living wage, in a development that led one member of the MPC – the external economist Catherine Mann – to push for interest rates to be held at 5%.
How does the Bank of England forecast inflation in 2026?
Inflation dropped back to 1.7% in September but the Bank has previously cautioned that the headline rate was on track to return beyond the target set by the government within months after an expansion in the Ofgem energy price cap for households in Great Britain in October.
In its latest projections, the Bank stated it expected inflation to peak at approximately 2.75% by the middle of next year and then remain outside target in 2026, until falling back in 2027 – a full year longer than it had anticipated in its previous forecasts, published in August.
Reeves expressed the interest rate cut would be “welcome news” for millions of households but that families were still confronting a challenge after Liz Truss’s mini-budget. She stated: “Today’s interest rate cut will be welcome news for millions of families, but I am under no delusion about the scale of the challenge confronting households after the earlier government’s mini-budget.
This government’s first budget has outlined how we are taking the long-term findings to fix the foundations to produce change by funding the NHS and rebuilding Britain while ensuring functioning people don’t face higher taxes in their payslips.”